Friday, May 15, 2015

San Bernardino Circles the Drain

Just released were details of San Bernardino's bankruptcy recovery plan. Referred to more delicately as a "plan of adjustment", the proposal calls for repaying bondholders one-percent of their investment in city bonds, or a penny for every dollar loaned the city. Perhaps encouraged by the City of Stockton, who in its bankruptcy reorganization plan repaid investors 11 cents per dollar, it's nonetheless a punishing outcome for those who invested their savings in municipal bond funds that hold San Bernardino bonds.

Further reported in the city's plan, are significant reductions to its firefighting forces, in a region well-known for wildfires. The bankruptcy plan also calls for cuts to ambulance services, park maintenance and graffiti removal, while extending a temporary sales tax, approved by voters back in 2006. As if these cuts to services weren't troubling enough, given the drubbing bondholders will take on their investment in San Bernardino bonds, it's hard to see how the city will raise money in the future for needed public projects. Fool me once...

A study of salaries of the 120 highest paid firefighters in San Bernardino reported by Bloomberg shows the top one-third drawing an average salary of $190,000 per year; the next third $166,000. In retirement, as early as age 50, these firefighters may be eligible for annual pensions of up to $171,000 per year, an obligation the city will need to pay for many years to come. This might, in part, explain the types of management decisions that led up to the city's bankruptcy.

Nevertheless, it has us wondering just what becomes of cities like San Bernardino, Stockton and Detroit. Higher taxes, reduced services and limited public improvements are hardly the building blocks of future growth and economic prosperity. Yet 200,000 residents continue to call San Bernardino their home, raise their families there and seek to enjoy its public amenities. The city has let these residents down, much in the way it now proposes to let down investors who loaned it money to build out its infrastructure. Let's just hope, and against significant odds, that the city's plan of recovery actually works.